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Item 3. Legal Proceedings

2022-04-15 compared with 2021-03-31 · 72 added, 93 removed, 18 unchanged (90% of the section changed)

Company is subject to various legal proceedings arising from normal business operations.

Although there can be no assurances,

based on the information currently available, management believes that it is probable that the ultimate outcome of each of the

actions will not have a material adverse effect on the consolidated financial statement of the Company.

However, an adverse outcome

in certain of the actions could have a material adverse effect on the financial results of the Company in the period in which

it is recorded.

Although there can be no assurances, based on

the information currently available, management believes that it is probable that the ultimate outcome of each of the actions will not

have a material adverse effect on the consolidated financial statement of the Company.

However, an adverse outcome in certain of the

actions could have a material adverse effect on the financial results of the Company in the period in which it is recorded.

Company owns U.S.

9,253,452 (the “‘452 Patent’”), which generally covers the automatic

activation and coordination of multiple recording devices in response to a triggering event, such as a law enforcement officer

activating the light bar on the vehicle.

9,253,452 (the “‘452 Patent’”), which generally covers the automatic activation

and coordination of multiple recording devices in response to a triggering event, such as a law enforcement officer activating the light

bar on the vehicle.

Company filed suit on January 15, 2016 in the U.S.

District Court for the District of Kansas (Case No:

2:16-cv-02032) against

Axon, alleging willful patent infringement against Axon’s body camera product line and Signal auto-activation product.

Company is seeking both monetary damages and a permanent injunction against Axon for infringement of the ‘452 Patent.

In December 2016 and January

2017, Axon filed two petitions for Inter Partes Review (“IPR”) against the ‘452 Patent.

The USPTO rejected

both of Axon’s petitions.

Axon is now statutorily precluded from filing any more IPR petitions against the ‘452 Patent.

2:16-cv-02032) against Axon, alleging

wilful patent infringement against Axon’s body camera product line and Signal auto-activation product.

The Company is seeking

both monetary damages and a permanent injunction against Axon for infringement of the ‘452 Patent.

December 2016 and January 2017, Axon filed two petitions for Inter Partes Review (“IPR”) against the ‘452 Patent.

The USPTO rejected both of Axon’s petitions.

Axon is now statutorily precluded from filing any more IPR petitions against the ‘452

District Court litigation in Kansas was temporarily stayed following the filing of the petitions for IPR.

However, on November 17, 2017,

17, 2017, the Federal District Court of Kansas rejected Axon’s request to maintain the stay.

With this significant ruling,

the parties will now proceed towards trial.

Since litigation has resumed, the Court has issued a claim construction order (also

called a Markman Order) where it sided with the Company on all disputes and denied Axon’s attempts to limit the scope

of the claims.

Following the Markman Order, the Court set all remaining deadlines in the case.

Fact discovery closed on

October 8, 2018, and a Final Pretrial Conference took place on January 16, 2019.

The parties filed motions for summary judgment

on January 31, 2019.

June 17, 2019, the Court granted Axon’s motion for summary judgment that Axon did not infringe on the Company’s patent

and dismissed the case.

Importantly, the Court’s ruling did not find that Digital’s ‘452 Patent was invalid.

It also did not address any other issue, such as whether Digital’s requested damages were appropriate, and it did not impact

the Company’s ability to file additional lawsuits to hold other competitors accountable for patent infringement.

solely related to an interpretation of the claims as they relate to Axon and was unrelated to the supplemental briefing Digital

recently filed on its damages claim and the WatchGuard settlement.

Those issues are separate and the judge’s ruling on summary

judgment had nothing to do with Digital’s damages request.

The Company filed an opening

appeal brief on August 26, 2019 with the U.S.

Court of Appeals for the Tenth Circuit (the “Court of Appeals”), appealing

District Court’s granting of Axon’s motion for summary judgment.

Axon responded by filing a responsive brief

on November 6, 2019 and we then filed a reply brief responding to Axon on November 27, 2019.

the Federal District Court of Kansas rejected Axon’s request to maintain the stay.

With this significant ruling, the parties will

now proceed towards trial.

Since litigation has resumed, the Court has issued a claim construction order (also called a Markman Order)

where it sided with the Company on all disputes and denied Axon’s attempts to limit the scope of the claims.

Following the Markman

Order, the Court set all remaining deadlines in the case.

Fact discovery closed on October 8, 2018, and a Final Pretrial Conference

took place on January 16, 2019.

The parties filed motions for summary judgment on January 31, 2019.

June 17, 2019, the Court granted Axon’s motion for summary judgment that Axon did not infringe on the Company’s patent and

dismissed the case.

Importantly, the Court’s ruling did not find that Digital’s ‘452 Patent was invalid.

not address any other issue, such as whether Digital’s requested damages were appropriate, and it did not impact the Company’s

ability to file additional lawsuits to hold other competitors accountable for patent infringement.

This ruling solely related to an interpretation

of the claims as they relate to Axon and was unrelated to the supplemental briefing Digital recently filed on its damages claim and the

WatchGuard settlement.

Those issues are separate and the judge’s ruling on summary judgment had nothing to do with Digital’s

damages request.

Company filed an opening appeal brief on August 26, 2019 with the U.S.

Court of Appeals for the Tenth Circuit (the “Court of Appeals”),

appealing the U.S.

District Court’s granting of Axon’s motion for summary judgment.

Axon responded by filing a responsive

brief on November 6, 2019 and we then filed a reply brief responding to Axon on November 27, 2019.

The Court of Appeals scheduled oral

arguments on our appeal of the U.S.

District Court’s summary judgment ruling on April 6, 2020.

District Court’s summary judgment ruling on April 15, 2020.

This appeal was intended

to address the Company’s position that the U.S.

District Court incorrectly dismissed our claims against Axon.

of Appeals overturns the ruling of the U.S.

If the Court of Appeals

overturns the ruling of the U.S.

District Court, the case will be remanded to the U.S District Court before a new judge.

On March 12, 2020, the panel of judges for the Court of Appeals issued an order cancelling the oral arguments previously set for

April 6, 2020, having determined that the appeal will be decided solely based on the parties’

On April 22, 2020,

a three-judge panel of the United States Court of Appeals denied our appeal and affirmed the District Court’s previous decision

to grant Axon summary judgment.

On May 22, 2020, we filed a petition for panel rehearing requesting that we be granted a rehearing

of our appeal of the U.S.

District Court’s summary judgment ruling.

Furthermore, we filed a motion requesting that

we be given an opportunity to make our case through oral argument in front of the three-judge panel of the Court of Appeals, which

motion was denied on June 9, 2020.

The Company had until November 7, 2020 to decide whether it would appeal the U.S.

District Court’s and Court of Appeals’

decisions to the United States Supreme Court.

The Company has abandoned

its right to any further appeals.

May 27, 2016, the Company filed suit against WatchGuard, (Case No.

2:16-cv-02349-JTM-JPO) alleging patent infringement based on

WatchGuard’s VISTA Wi-Fi and 4RE In-Car product lines.

May 13, 2019, the parties resolved the dispute and executed a settlement agreement in the form of a Release and License Agreement.

The litigation has been dismissed as a result of this settlement.

Release and License Agreement encompasses the following key terms:

paid Digital Ally a one-time, lump settlement payment of $6,000,000.

Ally granted WatchGuard a perpetual covenant not to sue if WatchGuard’s products incorporate agreed-upon modified recording

functionality.

Digital Ally also granted WatchGuard a license to the ‘292 Patent and the ‘452 Patent (and related

patents, now existing and yet-to-issue) through December 31, 2023.

The parties agreed to negotiate in good faith to attempt

to resolve any alleged infringement that occurs after the license period expires.

parties further agreed to release each other from all claims or liabilities pre-existing the settlement.

part of the settlement, the parties agreed that WatchGuard made no admission that it infringed any of Digital Ally’s

receipt of the $6,000,000 the parties filed a joint motion to dismiss the lawsuit with the court, which was granted.

From time to time,

we are notified that we may be a party to a lawsuit or that a claim is being made against us.

2020, the panel of judges for the Court of Appeals issued an order cancelling the oral arguments previously set for April 15,

2020, having determined that the appeal will be decided solely based on the parties’ briefs.

On April 22, 2020, a three-judge panel

of the United States Court of Appeals denied our appeal and affirmed the District Court’s previous decision to grant Axon summary

On May 22, 2020, we filed a petition for panel rehearing requesting that we be granted a rehearing of our appeal of the U.S.

District Court’s summary judgment ruling.

Furthermore, we filed a motion requesting that we be given an opportunity to make our

case through oral argument in front of the three-judge panel of the Court of Appeals, which motion was denied on June 9, 2020.

had until November 7, 2020 to decide whether it would appeal the U.S.

District Court’s and Court of Appeals’ decisions to

the United States Supreme Court.

The Company has abandoned its right to any further appeals.

time to time, we are notified that we may be a party to a lawsuit or that a claim is being made against us.

It is our policy to not disclose

1 unchanged sentence

After carefully assessing

the claim, and assuming we determine that we are not at fault or we disagree with the damages or relief demanded, we vigorously

defend any lawsuit filed against us.

the claim, and assuming we determine that we are not at fault or we disagree with the damages or relief demanded, we vigorously defend

any lawsuit filed against us.

We record a liability when losses are deemed probable and reasonably estimable.

are deemed reasonably possible but not probable, we determine whether it is possible to provide an estimate of the amount of the

loss or range of possible losses for the claim, if material for disclosure.

In evaluating matters for accrual and disclosure purposes,

we take into consideration factors such as our historical experience with matters of a similar nature, the specific facts and

circumstances asserted, the likelihood of our prevailing, the availability of insurance, and the severity of any potential loss.

We reevaluate and update accruals as matters progress over time.

While the ultimate

resolution is unknown, we do not expect that these lawsuits will individually, or in the aggregate, have a material adverse effect

to our results of operations, financial condition or cash flows.

When losses are deemed

reasonably possible but not probable, we determine whether it is possible to provide an estimate of the amount of the loss or range of

possible losses for the claim, if material for disclosure.

In evaluating matters for accrual and disclosure purposes, we take into consideration

factors such as our historical experience with matters of a similar nature, the specific facts and circumstances asserted, the likelihood

of our prevailing, the availability of insurance, and the severity of any potential loss.

We reevaluate and update accruals as matters

progress over time.

the ultimate resolution is unknown, we do not expect that these lawsuits will individually, or in the aggregate, have a material adverse

effect to our results of operations, financial condition or cash flows.

However, the outcome of any litigation is inherently uncertain

and there can be no assurance that any expense, liability or damages that may ultimately result from the resolution of these matters

will be covered by our insurance or will not be in excess of amounts recognized or provided by insurance coverage and will not

have a material adverse effect on our operating results, financial condition or cash flows.

will be covered by our insurance or will not be in excess of amounts recognized or provided by insurance coverage and will not have a

material adverse effect on our operating results, financial condition or cash flows.

Safety Disclosures.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 3. Legal Proceedings